Call First Capital Group, the investment arm of First Union, an opportunist. Lisa Brown-Premo, senior portfolio manager at First Capital, describes the total rate of return shop as always looking for prospects in the asset-backed market.

In fact, expect First Capital to be more involved in the ABS sector going forward, as Premo expects to do more volume on both the sell side and the buy side as the firm deepens a focus on relative value. While the firm continues to carry a bias for home equity paper - the company is overweighted in HEL compared to most indexes - First Capital has recently mulled buys in the high-yield CBO market and the stranded cost sector.

But watch the firm steer clear of the troubled manufactured housing market all together, as that sector has begun to cloud over. "We have more than I would like," Premo said. "Any is more than I would like."

Premo said First Capital has shifted its asset mix away from manufactured housing and more toward home equity loans over the past few years. She points to the recent trouble at Greensboro, N.C.-based Oakwood Homes as reason enough to stand on the side of the road to let the MOHO pass to someone more willing to roll down the credit spectrum.

"It's not been performing well at all," she said of the sector. "Oakwood announced [June 18] that they were going to miss their earnings by 50%. How can you miss by 50%? They must have been propping it up with chewing gum, tooth picks and bailing wire for a long time to miss it that badly."

In addition to home equity, First Capital buys credit cards, autos and CLO/CBOs.

Searching For Value With Room For Volume

Right now, Charlotte-based First Capital owns approximately $2 billion in asset-backed paper, which equals roughly 10% of the $20 billion in fixed income investments that Premo oversees. The ABS allocation will fluctuate between $1.5 billion and $3 billion, she said.

Though it's considered an opportunistic player, the company likes to benchmark most of its accounts to various market indices as much as possible, like the Lehman Aggregate and the Merrill Domestic Trust. Where First Capital bucks this trend is in the home equity sector, though, where it owns a few percentage points more HEL paper than all the benchmark indices. Premo said the HEL overweight not only represents a value play for First Capital, but in comparison with the numbers the indices have on the books, it matches more closely the volume that's being issued in today's market.

"There's more [HEL paper] being originated than what the indices represent," she said. "I think some of it is a function of folks either clinging to the past or not wanting to change the benchmark."

Other accounts will have bigger allocations to ABS compared with their overall volume depending on what index they're being benchmarked from. Premo said several funds and "specially managed accounts" are measured against the Government Corporate Index, which opens up the buy side in terms of asset-backed paper.

"They're pretty free and easy with what you can do with the money," she said. "We can go up to 10% or 15%."

Premo said First Capital would like to ramp up buys in the high-yield CBO sector, because though the firm has bought from this asset class, its volume does not nearly match the degree nor magnitude of the hefty amounts that have been issued.

The firm would also like to get acquainted with the stranded cost market, but Premo described plans to buy in this sector as dipping toes in the water as opposed to a complete dive. The political volatility, the strong demand and the spread-narrowing associated with these bonds have kept First Capital an interested bystander so far.

"We felt like they came out pretty fully offered right from the get-go," Premo said. "For a new product, usually there's a liquidity premium, or a new market premium. [These bonds] had little if any of that right from the beginning, then promptly tightened in right on top of credit cards.

"Then of course the whole California, land of fruits and nuts thing came up, and they widened pretty precipitously. We have just stood back from the situation so far. My guess is they're okay; they're probably fine in terms of an asset class. We just haven't been very involved yet." - SK

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